My House Burned Down!

What do you do when your house burns down? When you have rental properties it’s never good news when you get a text message from your property manager late on a Saturday night asking you to call ASAP.  My first thought when I heard the word fire was whether anyone was injured.  They were not.  My second thought was, what do I do when my house is now half burned and exposed in the frigid midwest winter less than a week before Christmas during a pandemic?  How much pain and how much money is this going to cost me? Now looking back many months later, I can share some lessons learned. 

Having a rental property burn may be the ultimate test of your mettle as a hands on investor (rather than simply holding a REIT or an index fund).  Along the way to repair, I learned some lessons that apply to hands on investing in general and also a whole lot about exactly what to do if this ever happens again.  If you don’t care about the specifics of a house burning you can now skip to the end of this article for the lesson (wow you are even more ADD than me).

disclaimer: this is only one man’s opinion and experience.  While it may provide context for others going through a similar situation it should not be considered specific advice.  In other words, don’t blame me.

Let’s start with the horror show that is the first few days.

The fire department put out the blaze dumping water all over everything. The house was not a total loss. However, I now had water damage to worry about as well as fire damage.  If it was summer this would have meant mold concerns.  However, it was below zero winter. Hence, I had frozen pipes and freezing damage to worry about instead.  It is tough to clear a house of carpets and charred garbage when it is all a frozen blob. Hence, we had to get in there ASAP covering openings, winterizing and/or heating the house, and moving debris to a dumpster.  And by we, I don’t mean me.  I was a few states away and travel was not advised due to the pandemic.  The only heavy lifting I could do in the first couple of days was picking up the phone and talking to lots of people.

Others Affected By The Flames

Tenants often want to claim what is left of their personal property.  As a landlord I needed to give them that option and record that I did.  My tenants made no claims of injury and abandoned all of their property.  Strange.  However, having liability insurance here is what allowed me to rest easy on possible financial loss claims from tenants.  In every state that I know of, renter’s personal property is not covered under the landlord / owner’s insurance.  While most tenants don’t get renter’s insurance this is the reason it is not a bad idea to do so. 

The fire marshall completed an investigation as to the cause of the fire.  Mine did not find a cause.  I assume that if tenants were found to have recklessly started the fire or did something egregiously illegal that the insurance company would pursue that.

Electrical and water were turned off as part of the fire department work.  In my case, the city also called my insurance company and put a hold on payouts to ensure that I didn’t abandon the heap and leave them with the bill.  Thanks a lot for your support city.

It’s going to cost six figures to fix this mess and by the way Merry Christmas.

I contacted my insurance company ASAP to start the claim and started reading my policy really really closely.  I was never so happy to have insurance.  Not just crappy “actual cash value” insurance that would only pay me the depreciated value of the property as is but replacement value insurance that brings the home back to good. 

There was a clause in my policy about making an effort to prevent further damage.  In other words, I can’t just leave everything exposed to the elements and then claim a total loss when squirrels move in and moss starts to grow in the kitchen because my insurance provider might rightly refuse to pay claiming that my negligence resulted in that further damage.  So it was time to act.  It is common for insurance to recommend that you get a restoration company that you like so that they can do an estimate together with insurance.   

My House Burned Down Lesson 1: choosing a restoration contractor carefully.

Even if I wanted to do all of the work myself I still got a restoration company.  The way it worked is that my guy and their estimator did a walk through. Each came up with an estimate.  I wanted them to match and to include the full extent of the damage and monetary loss.  Restoration companies know how to deal with insurance and should also be my advocate to get solid estimates.  However, I don’t let them cut me out of communication with my own insurance company. 

Many restoration companies want you to sign an agreement that they get your full insurance payout. They then allocate funds as an agent to repair the place.  This creates a conflict of interest of sorts where they have every incentive to charge insurance as much as they can and then do the minimum amount possible to demonstrate completion.  In fact, I tried to get two quotes from two restoration companies but one of them would not quote and insisted that I sign such an agreement.  Needless to say, I did not go with that company.

The more line items on the estimate the better.  This means it is thorough and specific.  It also can become a checklist to make sure that all of the work has been completed sufficiently.  For me it was a menu off of which I could choose what to repair myself versus have the pros handle.  It is very common that the restoration company finds additional damage over the course of the repairs as walls are opened etc.  My insurance is of course obligated to pay for all damage caused by the event covered under my policy.

Personal Property and a Fire

I mentioned that renter possessions are rarely covered under landlord property insurance. However, owner property in the house is often covered (depending on policy).  My policy covered personal property up to a max payout.  This meant that my appliances were covered.  Any records of the property can help with this claim including photos, model numbers, or even just a list of what was in the house.  For me there was some back and forth about whether I would be paid replacement value or prorated actual cash value based on age for personal property.  In the end I was given replacement value.

Rent Loss and a Fire

Since my house was a rental, I had a policy that included lost rent recovery.  This meant that the whole time repairs were happening I was getting paid my lost rent by insurance.  Not bad and instead of the house getting slowly damaged by tenants it was actually getting fastly improved.  Woohoo!

Saving Money On Fire Repairs Through Affordable Replacements

I have heard that some rehab companies will actually not make you pay your deductible portion and instead complete repairs with whatever the balance is from insurance.  This may not be legal so be careful.  However, what I did was find ways to save money to offset my cash outlay from the deductible.  I saved money on the repairs by adding different less costly finishings, and saved money based on this difference.  For example I lost a tile floor in the fire and was entitled to payout for that full loss.  However, if I replace it with vinyl planks, I might be able to save a couple thousand dollars to recoup what I paid on my deductible or more.  If I lost a $3,000 stove but replaced it with a $2000 one, that’s a grand back in the black.  Yay and AC/DC’s “Back in Black” plays in my head. 

Saving Money on Fire Repairs Through DIY

I mentioned trying to get a very specific line itemed estimate from whoever quotes restoration.  For me I simply went through this like a menu and ordered the things I wanted to do myself to save cash.  For example window treatments are expensive but I could buy the cheap ones at home depot and install myself saving $1,500. 

I could buy and install the appliances saving a couple thousand off of the restoration company quote.  Rather than $150 per light fixture I quickly installed new ones myself that cost $30 each at home depot.

 disclaimer: electrical work is dangerous if not a professional.  Do not attempt it without further professional guidance.  

I also replaced heat registers myself, installed a towel rack, and did some other random repairs.  In all I was able to save about $7,000 by working on the place for one long weekend.  Let me repeat that.  I flew back for one long weekend during the pandemic:

I got to see family but was there for work. Hence, all my travel and expenses could be partially written off tax wise as business expenses.  By doing so I saw my brothers from 6 feet away and was also able to save about $7K in direct repairs!  Not all bad.

Saving Money By Holding Everyone Accountable.

On this rehab, I never authorized any repairs that were not first approved by my insurance company via email.  I only paid for work once it was satisfactorily completed.  This seems obvious but I have heard far too many horror stories of people paying trades-people or contractors before the job is done and then the dude vanishes in the wind or never returns your call for the minor finishes left undone.  Only when the job was fully complete did I fully pay.  This also made sure that I got my full rent reimbursement payout from insurance up until the last light bulb and paint touchup. When All was said and done, the place looked pretty great…      

How To Be A Zen Like Investor When Things Go Sideways

Hands on investment can make a better return than index investing but it requires…um…hands on.  

Just as buy and hold stock investors need to stay emotionally solid and stay the course when there are market crashes, so it goes with being an active investor in real estate, small business, etc.  Some of the worst decisions are made when emotions are high.  This applies to a late night out at the bar, a traumatic loss like a fire or disaster, or any manner of $#*% hitting the fan situations.  

It is tough to not stress out when your home is a burnt pile of rubble and six figures in losses are at stake.  In many ways, a fire burning your rental property may be the ultimate test of trying to stay emotionally separate from your hands on investments.  However, committing to doing so is crucial to sleeping well at night and also important in making good decisions.   

Bad things can and will happen but wealth building is more about the cumulative tide of many decisions rather than one or two mistakes or bad luck events.  In this case, my bad luck was a fire and at the worst possible time (a pandemic and in the middle of Minnesota winter).  However, I had made lots of good decisions.  I had chosen quality insurance and also had purchased a good home at a good price.  I had a list of contacts that I could reach out to for help.  So how did it all turn out?

My Tragedy Turns Into Luck Somehow!?

At the end of a few months of navigating insurance and fire rehab, I had a house that showed better than the one that I had before the fire.  I chose paint, flooring, appliances, and fixtures that cost similar to what I had lost but were much more modern and fresh looking:

Rather than take my shiny rehabbed property and put a renter in there to abuse everything, I decided to list it for sale at a premium.

Spring break came and I was in Florida headed into Everglades National Park with my family.  My realtor called with an offer far over asking price.  I told her that I’d think about it and be in touch that evening. However, really I just set it aside to enjoy the day seeing crocs, gators, birds, and fish. 

The same buyer ended up raising their offer by another 15% and I told my realtor in astonishment that I didn’t even have confidence that it could appraise out at that offer price.  Somehow it did.  The housing market is insane right now.  

I made more than a 50% profit on the sale. I had also realized another $7K by spending that one weekend back in the midewest with some tools. It feels pretty weird to do a deal worth an annual salary all while being several states away and on vacation.

Guy makes an annual salary while on vacation by taking one phone call.

This was the kind of make it look easy type of real estate story that I remembered reading in all of those books I had checked out on real estate investing back when I was just starting out. It belies the truth of the physical and emotional work on the journey. I thought back to the fire call I had received on a cold Saturday night a few months prior and I had to chuckle. Not every investment works out like this one, but some do. At the end of the day it is just an investment. Things go up and down in a portfolio and bad things happen occasionally. However, the cumulative tide of diligence and decisions prevails. There are centuries of data showing that investing money into income producing capital (stock, real estate, businesses, etc) generates income with the passage of time.

Do you have an a hands on investment tragedy that turned out to be an opportunity in disguise? Do you have advice from your own experience of staying focused when the $%*! hits the fan? I’d love to hear yours in the comments below.

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